Missing Water Markets: a Cautionary Tale of Governmental Failure
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Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 3-2015 Missing Water Markets: A Cautionary Tale of Governmental Failure Vanessa Casado-Pérez Texas A&M University School of Law, [email protected] Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar Part of the Water Law Commons Recommended Citation Vanessa Casado-Pérez, Missing Water Markets: A Cautionary Tale of Governmental Failure, 23 N.Y.U. Envtl. L.J. 157 (2015). Available at: https://scholarship.law.tamu.edu/facscholar/761 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact [email protected]. MISSING WATER MARKETS: A CAUTIONARY TALE OF GOVERNMENTAL FAILURE VANESSA CASADO-PEREZ* California is facing a water crisis. Water is managed through a variety of mechanisms, including government administrationand market tools. This Article argues for a regulated market-based solution. When it comes to water markets, the invisible hand needs help from the visible hand of government to prove effective. Administrative systems and markets are usually portrayed in opposition to each other, as mutually exclusive solutions. Water market advocates suggest government's role is minimal. However, as this Article identifies, to establish and maintain a functioning water market, government needs to play a variety of roles. These include the uncontested role of defining property rights, but additional roles are necessary such as reviewing transactions to prevent uncompensated externalities, structuring the management of water infrastructureand fulfilling the market maker role. This-Article presents a taxonomy of the roles that government must play to ensure that water markets operate efficiently. It then empirically tests that taxonomy with a case study of the water market Spain established in 1999. That market's mixed record has important implications for California and other U.S. water markets, especially during drought conditions. Spain's water * Lecturer and Teaching Fellow of Environmental Law and Policy, Stanford Law School. Ms. Casado-Pdrez holds a J.S.D. from the New York University School of Law; an LL.M. from the University of Chicago Law School; and an LL.B., LL.M., and B.A. from the Universitat Pompeu Fabra in Barcelona. I would like to thank Albert Azagra, Richard A. Epstein, Alberto Garrido, Daniel E. Ho, Lewis A. Kornhauser, Bernardette Meyler, Hillary Nye, Sarah W. Rajec, Jacob H. Russell, Karen B. Schulz,, Frank Upham, and especially Katrina M. Wyman for their comments. I want to also thank all those public officials, private practitioners, and scholars who have spared some of their time to help me understand the murky intricacies of water law and water management in California and Spain. I am also thankful to the NYU EJL editors and the participants at the JSD forums at NYU, the Fellows' workshop at Stanford Law School, the Bill Lane Center American West workshop, Water in the West All- hands workshop, and the Legal Studies Workshop at Stanford Law School. Errors are mine alone. 157 Imaged with Permission of N.Y.U. Environmental Law Journal 158 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 23 market system was closely modeled on California's, in part because Spain and California share similar geographies and climates, and it was tested by a severe drought. However, as this Article shows, the volume of market transactions did not increase measurably during the drought, suggesting that the market failed in its role of mitigating inefficient water allocation. This Article argues that this failure resultedfrom the Spanish government not performing functions that could have facilitated market transactions-functionsthat California may also fail to play in the ongoing drought. Drawingfrom this empirical case study of water markets in Spain, this Article argues that each of these roles is necessaryfor the success of water markets as a tool to mitigate the effects of drought crises. Spain introduced water market mechanisms in 1999 and explicitly stated it was imitating California's system. However, Spanish governmental agencies erred in their design and implementation, and water markets have not become an effective tool to respond to scarcity. These lessons about the proper role of government from the Spanish case study have important implications for states in the American West facing similar water management challenges. INTRODUCTION ........ 159 I. ROLES OF GOVERNMENT IN WATER MARKETS: MARKET FAILURES AND BEYOND ............................ 1 64 A. Definition of PropertyRights....................... 167 B. Externalities ................. .................. 169 C. Management of Water TransportationInfrastructure .... 175 D. Market Maker Role ..................................178 II. INTRODUCTION TO THE SPANISH CASE STUDY................ 181 A. DistributionofPowers Over Water Allocation............... 181 B. GeneralOverview of the Property Rights Over Water .............................................184 1. Permitsfor Water Use .................. ..... 185 2. PrivateProperty Rights ...................... 1 95 3. IrrigationRights in IrrigationAreas ofPublic Initiative ......................... .....1 97 III. WATER MARKETS: THE 1999 AMENDMENT ... ............. 198 IV. TRANSACTION FIGURES AND DATA SHORTCOMINGS: HAVE WATER MARKETS IN SPAIN BEEN ACTIVE? ..... ... .. 206 V. GOVERNMENTAL ROLES........................................ 211 Imaged with Permission of N.Y.U. Environmental Law Journal 2015]1 MISSING WATER MARKETS 159 A. The Uncontested Governmental Role in Water Markets: Definer ofPropertyRights, a Public Good.... .......... 211 1. Security ...................................... 211 2. Tradability ......................... ......... 216 B. Externalities:Apparently Not a Major Concern............. 221 C. Infrastructure:Provision and Management.................... 227 D. Market Maker Role .............................. 234 CONCLUSION ....................................... ....... 240 INTRODUCTION California is currently suffering from the most severe drought in decades.' Governor Jerry Brown has declared a state of emergency. 2 Emergency measures may include cutbacks on household water use, perhaps even beyond non-essential outside uses. 3 The mandatory emergency measures may produce long- lasting effects; some of the measures enacted may become permanent or bring permanent behavioral changes.' People may become more conscious in their water use and reduce their consumption going forward.5 But this is not enough; government I Press Release, Cal. Dept. of Water, Dry Water Year 2014 Ends Tomorrow (Sept. 29, 2014), available at http://www.water.ca.gov/news/newsreleases/2014/ 092914drywateryear.pdf. 2 Press Release, Office of Gov. Edmund G. Brown Jr., Governor Brown Declares Drought State of Emergency (Jan. 17, 2014) available at http://gov.ca.gov/news.php?id=1 8368. 3 To meet the 20 percent reduction in water use mandated by the Governor, some local agencies have enacted measures prohibiting filling pools or irrigating lawns on consecutive days. See, e.g., Alameda County Water District, Cal., Ordinance 2014-01 (Mar. 13, 2014), available at http://www.acwd.org/ DocumentCenter/View/63 1. 4 After the 2008 crisis, many emergency strategies became permanent in Catalonia, Spain, and many municipalities continue to irrigate their green areas with brackish water. Reutilizaci6n y aprovechamiento de aguas [Water Use and Reuse], AIGUES DE BARCELONA, http://www.aiguesdebarcelona.cat/reutilizacion- y-aprovechamiento-de-aguas-recursos-alternativos, (last visited Feb. 27, 2015). 5 This is the case in Barcelona. As result of the several drought periods during the 2000s, consumption in Barcelona was reduced to 110 liters (29 gallons) per person per day, and during the drought, people consumed 10 percent less. See Joaquim Lloveras MaciA, Consideracions sobre l'enginyeria per a l'estalvi d'aigua al sector domestic a Catalunya [Considerations for Water Conservation Engineerings in Catalonia], ETSEIB, available at http://upcommons.upc.edu/e-prints/bitstream/2117/7564/1/consideracions.pdf. In 2001, the consumption of water was 18 percent lower than in 1999. See Press Release, Ajuntament de Barcelona, Barcelona redueix un 15% el consum d'aigua Imaged with Permission of N.Y.U. Environmental Law Journal 160 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 23 policies to avoid and mitigate drought are necessary. Unfortunately, government action in the wake of a drought crisis might erode another government policy designed to avoid such a crisis in the first place: water markets. In particular, emergency measures may produce uncertainty if they override established expectations about water allocation, and this uncertainty would undermine parties' ability to trade in the market. California has one of the most active, albeit imperfect, water markets in the western United States. 6 Water markets are supposed to work as a mitigation tool for both structural scarcity (i.e., the misallocation between the agricultural sector and urban areas) and drought (when there is not enough water for all users entitled to it).7 Roughly speaking, California apportions its water based on a system of temporary priority, which ensures certainty about who will suffer the first cutbacks.8 These clear rules of allocation may en 12 anys [Barcelona Reduces Water Consumption by 15% in 12 Years]